Berko: Sell or hold Pharmacyclics?

One of the strategies that you recommended to me 10 years ago was to watch the portfolios of T. Rowe Price Health Sciences Fund and Fidelity Select Biotechnology Fund and buy some of the attractive new positions that appear in their portfolios. I’ve learned a lot by following those funds’ buy and sell selections and made some good money in the process. One of the stocks owned by both funds is Pharmacyclics, and I bought 100 shares early this year at $62. As you can see, I have a huge profit, because it’s now $115.84. My broker and partner in crime (he uses the same technique for selected clients) thinks I should sell the stock and lock in a profit. Taxes are not a consideration, and frankly, I don’t know whether I should continue to hold it (both Fidelity and T. Rowe Price still own the stock) or take my profit. Your input would be helpful to me.

J.H., Jonesboro, Ark.

Dear J.H.:

Pharmacyclics Inc. (PCYC-$115.84) is a clinical-stage biopharmaceutical company that focuses on the commercialization and development of small-molecule drugs for the treatment of cancer and immune-mediated inflammatory diseases. I recall when a terribly obnoxious state politician whom I’m ashamed to know bragged to me a few days after New Year’s in 2000 that he had bought 800 shares of Pharmacyclics at $47 on margin. In other words, he only had to put up 50 percent of the purchase price (about $20,000), and the brokerage would lend him the remaining 50 percent. I think he believed that PCYC was on the cusp of finding a cure for alopecia, toenail fungus, tinnitus, brainpan warts and anacusis all in one pill. I was infected by his enthusiasm, almost became a believer and nearly bought 200 shares but chickened out. A month later, he sold PCYC at $82, made a swift $28,000, bought a new Lincoln and married his secretary. Then, at the end of the year, when the share price had tumbled way back down to the $47 level, he purchased 2,000 shares, on margin once again. It wasn’t much later that the share price began to fall like tears from a tall camel’s eye, and within a dozen months, PCYC was trading at less than a buck a share. Sometime during the following year, he gave up the Lincoln, and his wife gave him up.

But today it appears the company has smartly whacked the pinata with a drug called Ibrutinib, or PCI-32765. Ibrutinib is considered a “breakthrough” drug by the Food and Drug Administration for the oral treatment of chronic lymphocytic leukemia and multiple myeloma and has accepted its new drug application for filing. The results of the clinical data are so strong that there’s little doubt about the success of this drug, which PCYC will price at $125,000 for a year’s worth of treatment. PCYC also believes that Ibrutinib can be a successful treatment for other blood cancers, so some analysts reckon this drug could generate more than $9 billion in annual revenues. And lucky Johnson & Johnson (JNJ-$92.84), which invested $200 million from its annual $12 billion of levered free cash flow, gets to keep half the annual sales proceeds, or $4.5 billion a year.

PCYC has three other impressive formularies, one of which (PCI-27483) has its research and development being funded by Novo Nordisk A/S (NVO-$170.54), a huge Danish pharmaceutical company. If the reports are true, PCI-27483 has demonstrated significant results in the treatment of pancreatic cancer. A growing number of investors are familiar with Ibrutinib, which is the primary reason for PCYC’s meteoric rise. However, few investors have heard about PCI-27483, which could be another breakthrough blockbuster drug with billions in annual revenues. Unfortunately, PCI-27483 still continues in phase 11 trials, and a new drug application may be a couple of years away.

But whether to sell or not to sell, isn’t that the question? The simple answer is: Sell 50 shares, and allow the remaining 50 to sit comfortably in your account at Morgan Stanley. Or if your broker has the proper skills, you might consider the purchase of a put option on the stock as it rises.